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March 30, 2001
Reasonably healthy economic data and a stock market rebound have hurt mortgage rates, now around 7.25% on low-fee deals.
The Dow is 700 points above its intra-day low last Thursday, and joined by gains in broad market indexes. 30-year Treasury bond yields have risen from 5.21% to 5.46%, and have driven the same quarter-point rise in mortgages.
The two leading measures of consumer confidence improved in March, and for good reason: personal income rose point-four percent, and sales of new and existing homes held near-record levels. New claims for unemployment insurance are running 75,000/week ahead of last year, but fell in the most recent week.
Despite this last, good week for stocks, investor portfolios have lost at least 25% of their value in the last year; and if the investor was a fan of technology... the losses are closer to 60%.
Why hasn't this implosion run the "wealth effect" in reverse, taking the economy down? Or is it in the process of doing so, and we can't yet detect the hollowing-out?
The links between stocks and real economic activity are tenuous. One is consumer confidence, which looked bad for a while, but is turning upward. Apparently there is a big difference between losing a lot of hard-earned cash paid into the market, which has not happened, as opposed to losing some extraordinary profits on paper, which has.
A second link: savings behavior. Theoretically, consumers stopped saving altogether four years ago as the stock market soared. Some argue that consumers stopped saving because the stock market was saving for them, and will now curtail their spending in order to resume saving the old-fashioned way, which would slow the economy.
Nice theory, but it hasn't happened. Consumers are spending freely. And, the national savings rate data are suspect: the savings rate is not measured directly, but as the residual of national income minus consumption. Any under-measurement of income understates savings.
A third link, stock market to economy: capital spending. There aren't a lot of companies thinking of selling more stock in order to raise money for capital spending. In techland, a central problem appears to be that too many companies have over-invested in hardware, laid too many fiber-optic networks, and in general way over-estimated future demand. Examples: Palm stock, down 95% in a year; and Cisco (now a $15 stock), some of whose customers are struggling to pay for last year's equipment purchases.
That's the kind of problem which can ripple outward, and cause the economy to downshift again. Payroll data due April 6 might show a downshift, but I bet it doesn't show the layoffs necessary to take mortgages to the sixes.
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